An arbitrary spike in market direction can lead to a strong V-shaped reversal pattern.

One of the best risk/reward trade opportunities, occurs when the markets spike in one direction, then dramatically reverse, forming a V-shaped pattern. The cause for the initial spike is varied for example a news release, break of an important level, increased volume. The key factor to watch our for is the angle of price change, the steeper the angle, the more likely there will be some form of reversal when the move runs out of steam.

If a market is slowly moving up or down, it is likely in a trend, and seeking a new equilibrium point. A steep and quick change of prices is often reactionary, and can lead to a quick reversal.

US SP500 Futures Market (ES) on Thursday 18th July 2019

The chart above shows the US Stockmarket index futures, yesterday. It was a fairly volatile day, following a large sell off the day before. The swings where fairly strong, and there was a lot of choppy action in the market.

The speed and sharp angles of the upswings and downswings, along with the fact that the market is not in a trend, gives indications there may be a V-shaped reversal and key levels. Although not easy to determine the swing points, in this particular case the outer VWAP Standard Deviation bands (shown in red and green acted as resistance and support levels. Another good indicator is the double top formed on the the first upswing.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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